EX-13 16 0016.txt EXHIBIT 13.1 273 THIS PAGE LEFT BLANK INTENTIONALLY 274 Financial Information Table of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Statement of Management Responsibility 22 Independent Auditor's Report 23 Consolidated Financial Statements 24 Notes to Consolidated Financial Statements 28 Shareholder Information 38 Except for historical information contained herein, the matters Discussed contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those suggested in the forward-looking statements, including, without limitation, the effect of economic conditions, product demand, currency exchange rates, labor disputes, competitive products and other risks detailed herein and in the Company's other filings with the Securities and Exchange Commission. 275 Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations. Net sales for fiscal 2000 increased 12 percent to $1.678 billion, compared to $1.500 billion in fiscal 1999 and $1.513 billion in fiscal 1998. Fiscal 2000 growth was driven by higher audio system sales to automakers and personal computer manufacturers and higher professional audio sales. Sales were down slightly in fiscal 1999 due to weakness in Asian markets and our decisions to discontinue marginally profitable product lines and dealers and to initiate a destocking program with our international distributors. Weakness in European currencies reduced our reported sales as compared to the prior year in both fiscal year 2000 and fiscal year 1999. Excluding currency effects, fiscal 2000 sales increased 17 percent over the prior year. The Company experiences seasonal fluctuations in sales and earnings. The first fiscal quarter is the weakest due to automotive model changeovers and the July and August holidays in Europe. Variations in seasonal demands among end-user markets may also cause operating results to vary from quarter to quarter. The Company's businesses are organized by the end-user markets they serve. The Consumer Systems Group manufactures loudspeakers and electronics for high fidelity audio reproduction in the home, with computers and in vehicles. The Professional Group manufactures loudspeakers and electronics used by audio professionals in concert hall, recording, broadcast and cinema applications. Consumer Systems Group sales increased 13 percent to $1.202 billion in fiscal 2000, compared to $1.066 billion in fiscal 1999 and $1.050 billion in fiscal 1998. Sales to automobile manufacturers increased 12 percent, primarily reflecting higher audio system shipments to Toyota and growth in radio and navigation system shipments to the Mercedes Benz division of Daimler Chrysler. Sales to personal computer manufacturers more than doubled, resulting from the success of our Harman Kardon audio systems offered with Apple and Dell computers and higher JBL audio systems sales to Compaq. Fiscal 2000 sales to consumer electronics dealers and distributors approximated prior year levels, reflecting higher sales in North America offset by lower sales in international markets due to our dealer destocking program. Fiscal 1999 sales were slightly higher than the previous year due to higher sales to automobile and personal computer manufacturers offset by lower sales to consumer electronics dealers and distributors. Professional Group sales increased 10 percent to $476 million in fiscal 2000, compared to $434 million in fiscal 1999 and $439 million in fiscal 1998. JBL Professional, AKG, Harman Music Group and Lexicon all reported good growth. AKG's sales of miniature transducers for mobile phones and hands-free microphone applications in vehicles were especially robust. The March 2000 acquisition of Crown International, a professional amplifier manufacturer based in Indiana, also contributed to the growth. Fiscal 1999 sales were down slightly due to weak Asian markets, the discontinuance of marginally profitable product lines and lower sales in our mixing console businesses, offset by higher sales from JBL Professional, AKG and BSS and a one-time $11.0 million sale of broadcast software. The consolidated gross profit percentage was 28.0 percent in fiscal 2000, compared to 26.5 percent in fiscal 17 276 Management's Discussion and Analysis of Financial Condition and Results of Operations continued 1999 and 26.8 percent in fiscal 1998. Gross profit increased 18 percent to $469 million in fiscal 2000, compared to $398 million in fiscal 1999 and $406 million in fiscal 1998. Fiscal 1999 gross profit included special charges totaling $24.3 million to reduce the carrying value of inventories of discontinued product lines. Excluding these charges, the fiscal 1999 gross profit percentage was 28.1 percent, approximately the same as the fiscal 2000 percentage. In fiscal 2000, the majority of the Consumer Systems Group and Professional Group companies reported a higher gross margin percentage than the prior year, but this was offset by lower margins on sales to international consumer audio dealers and distributors due to lower factory overhead absorption and other effects of the destocking program. Selling, general and administrative expenses as a percentage of sales were 20.7 percent in fiscal 2000, compared to 21.5 percent in fiscal 1999 and 20.2 percent in fiscal 1998. Excluding $5.1 million in special charges, fiscal 1999 selling, general and administrative expenses as a percentage of sales were 21.1 percent. The decrease in fiscal 2000 selling, general and administrative expenses as a percentage of sales was due to cost savings realized from the implementation of restructuring programs in fiscal 1999, partially offset by higher investments in business infrastructure but at a rate of increase lower than the sales growth rate. Fiscal 1999 selling, general and administrative expenses increased primarily due to a $10 million increase in engineering and development costs to support new business with automakers and personal computer manufacturers. Fiscal 2000 research, engineering and development costs approximated the prior year due to increased expenditure levels, particularly in our German automotive electronics development operations, offset by the effects of currency translation. In fiscal 1999, Harman reported plant closing and severance costs of $17.0 million, equal to 1.1 percent of sales, and asset impairment costs of $20.0 million, equal to 1.3 percent of sales. The plant closing and severance costs resulted from the closure of the El Paso, Texas, electronics plant, the closure of other smaller facilities and elimination of full-time positions in certain other locations. The asset impairment charge resulted from the write-down of tooling, factory equipment and other assets associated with discontinued product lines and other write-downs of assets that will no longer provide economic benefit to Harman. In fiscal 2000, operating income increased to $121.7 million, compared to $38.7 million in fiscal 1999 and $100.3 million in fiscal 1998. Operating income as a percentage of sales was 7.3 percent in fiscal 2000, compared to 2.6 percent in fiscal 1999 and 6.6 percent in fiscal 1998. Excluding prior year restructuring charges, Consumer Systems Group operating income increased 10 percent to $97.6 million, driven by sales growth, higher gross margins and overhead reductions resulting from last year's restructuring, partially offset by $21 million of losses incurred in sales to international distributors due to our dealer destocking program. Excluding prior year restructuring charges, Professional Group operating income increased 34 percent to $36.1 million. Sales growth, higher gross margins and overhead reduction 18 277 programs implemented in last year's restructuring contributed to the operating income growth. Unallocated corporate and other operating expenses approximated prior year levels. The decrease in fiscal 1999 operating income was due to the special charges totaling $66.4 million discussed previously. Excluding these charges, operating income was 7.0 percent of sales in fiscal 1999. Interest expense in fiscal 2000 was $18.5 million, compared to $23.6 million in fiscal 1999 and $24.9 million in fiscal 1998. Fiscal 2000 interest expense decreased due to lower average borrowings, resulting from the use of strong operating cash flows to reduce revolving credit facility borrowings, and lower interest rates. Fiscal 2000 average borrowings were $325.4 million, compared to $397.1 million in fiscal 1999 and $382.4 million in fiscal 1998. Interest expense decreased in fiscal 1999 due to lower average interest rates. The weighted average interest rate in fiscal 2000 was 5.7 percent, compared to 6.0 percent in fiscal 1999 and 6.5 percent in fiscal 1998. The decrease in average interest rates in fiscal 2000 was due to a lower percentage of US Dollar denominated debt. The decrease in average interest rates in fiscal 1999 was due to the December 1, 1998, retirement of $45 million of 11.2% notes, funded with revolving credit facility borrowings. As a result, in fiscal 2000 the Company reported income before income taxes, minority interest and extraordinary item of $102.8 million, compared to $14.4 million in fiscal 1999, $80.9 million before restructuring charges, and $75.7 million in fiscal 1998. In fiscal 2000, the Company reported income tax expense of $29.9 million, an effective tax rate of 29.1 percent. This compares with income tax expense of $2.7 million and an effective tax rate of 18.7 percent in fiscal 1999. Fiscal 1998 tax expense was $21.9 million with an effective tax rate of 28.9 percent. The effective tax rates for fiscal years 2000, 1999 and 1998 were below the U.S. statutory rate due to utilization of tax credits, realization of tax benefits for United States exports and the utilization of tax loss carryforwards at certain foreign subsidiaries. The effective rate for fiscal 1999 was significantly below the statutory rate because the above benefits offset a lower pretax income base. The Company reported an extraordinary charge, net of related tax benefits, of $3.6 million in fiscal 1998 due to the early extinguishment of $64 million of 12.0 percent notes, due August 1, 2002. The debt retirement was funded with proceeds from the issuance of ten-year senior notes bearing interest at 7.32 percent. The Company reported no extraordinary charges in fiscal years 2000 or 1999. Net income for fiscal 2000 was $72.8 million, compared with $11.7 million in fiscal 1999 and $50.2 million in fiscal 1998. Excluding restructuring charges, fiscal 1999 net income would have been $57.6 million. Liquidity and Capital Resources. Harman International primarily finances its working capital requirements through cash generated by operations, a revolving credit facility and normal trade credit. 19 278 Management's Discussion and Analysis of Financial Condition and Results of Operations continued The Company and certain subsidiaries have a multi-currency revolving credit facility with a group of eleven banks committing $275 million to the Company for cash borrowings and letters of credit through September 30, 2002. At June 30, 2000, the Company had outstanding indebtedness under the revolving credit facility of $15.0 million, outstanding letters of credit of $7.3 million and unused credit thereunder of $252.7 million. The indebtedness at June 30, 2000, consists of committed rate loans, which bear interest at LIBOR plus 0.20 percent, and swing line borrowings, which bear interest at base rates. The Company and certain subsidiaries have a term loan with a group of banks led by Commerzbank committing 150 million German marks to the Company for cash borrowings through August 30, 2002. At June 30, 2000, the Company had outstanding indebtedness under this facility of 150 million German marks, equal to $73.2 million. The indebtedness at June 30, 2000, bears interest at LIBOR plus 0.30 percent, equal to 4.7 percent. At June 30, 1999, certain international subsidiaries of the Company maintained unsecured short-term lines of credit of $16.2 million and had outstanding indebtedness thereunder of approximately $11.8 million. Capital expenditures, net of lease financing, were $80.4 million in fiscal 2000, compared with $67.8 million in fiscal 1999 and $57.5 million in fiscal 1998. Expenditures in fiscal 2000 and 1999 were for equipment and facilities required to increase manufacturing capacity and efficiency, primarily in our businesses supplying the automotive industry, and new product tooling. The Company anticipates capital expenditures of approximately $130 million during the next fiscal year. Firm commitments of approximately $22.4 million existed as of June 30, 2000, for capital expenditures during fiscal 2001. The Company anticipates that a portion of these capital expenditures will be financed through lease financing arrangements. Net working capital at June 30, 2000 was $309.6 million, compared with $359.8 million at June 30, 1999. The decrease primarily results from higher accounts payable, due to increased business volume and the timing of payments to vendors, accruals for costs to integrate and rationalize operations and higher accrued income taxes due to major growth in income. Excess of cost over fair value of assets acquired was $166.6 million at June 30, 2000, compared with $140.8 million at June 30, 1999. The increase was due to the acquisitions of Innovative Systems, GmbH, a leading developer of automotive navigation software located in Hamburg, Germany, and Crown International, a professional audio amplifier manufacturer based in Elkhart, Indiana. Shareholders' equity was $486.3 million at June 30, 2000, compared with $468.2 million at June 30, 1999, and $511.9 million at June 30, 1998. The increase in fiscal 2000 resulted from net income offset by common stock repurchases totaling $36.0 million and negative foreign currency translation adjustments totaling $17.2 million due to the weakening of the Euro against the U.S. dollar. The decrease in fiscal 1999 resulted from common stock repurchases totaling $34.0 million and negative foreign currency translation adjustments of 20 279 $20.4 million due to the weakening of the Euro against the U.S. dollar. Through July 1999, common stock repurchase authorizations by Harman's Board of Directors totaled 2.5 million shares. In August 2000, the Board of Directors authorized a two-for-one stock split and also authorized the repurchase of an additional two million shares, post-split. Through June 30, 2000, the Company had acquired and placed in treasury 1,744,000 shares of its common stock at a total cost of $70.0 million. In July 2000, the Company repurchased an additional 625,000 shares. Future repurchases are expected to be funded with operating cash flow. Cash generated by operations and the unused credit available under the revolving credit facility should provide sufficient funds to meet the Company's working capital, capital expenditure, dividend, debt service and share repurchase requirements through the next twelve months. The Company is subject to various risks, including dependence on key customers, economic conditions affecting disposable consumer income and fluctuations in currency exchange rates. A disruption in the operations of one of our key customers, such as an automotive strike, could have a material adverse effect on the Company. Effects of Inflation and Currency Exchange Rates. The Company maintains significant assets and operations in Germany, the United Kingdom, Denmark, France, Austria, Switzerland, Mexico and Sweden. As a result, exposure to foreign currency gains and losses exists. A portion of foreign currency exposure is hedged by incurring liabilities, including bank debt, denominated in the local currency where subsidiaries are located. The subsidiaries of the Company purchase products and parts in various currencies. As a result, the Company may be exposed to cost increases relative to local currencies in the markets to which it sells. To mitigate such adverse trends, the Company enters into forward exchange contracts and other hedging activities. Also, foreign currency positions are partially offsetting and are netted against one another to reduce exposure. Some products made in the U.S. are sold abroad. As a result, sales of such products are affected by the value of the U.S. dollar relative to other currencies. Any long-term strengthening of the U.S. dollar could depress these sales. Competitive conditions in the Company's markets may limit its ability to increase product pricing in the face of adverse currency movements. However, due to the multiple currencies involved in the Company's business and the netting effect of various simultaneous transactions, the Company's foreign currency positions are partially offsetting. Recent Accounting Pronouncements. Recent accounting pronouncement SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, is discussed in footnote 1 to the consolidated financial statements, Summary of Significant Accounting Policies. 21 280 Statement of Management Responsibility The consolidated financial statements and accompanying information were prepared by, and are the responsibility of, the management of Harman International Industries, Incorporated. The statements were prepared in conformity with generally accepted accounting principles and, as such, include amounts that are based on management's best estimates and judgements. The Company's internal control systems are designed to provide reliable financial information for the preparation of financial statements, to safeguard assets against loss or unauthorized use and to ensure that transactions are executed consistent with Company policies and procedures. Management believes that existing internal accounting control systems are achieving their objectives and that they provide reasonable assurance concerning the accuracy of financial statements. Oversight of management's financial reporting and internal accounting control responsibilities is exercised by the Board of Directors through the audit committee which consists solely of outside directors. The committee meets periodically with financial management and the independent auditors to ensure that each is meeting its responsibilities and to discuss matters concerning auditing, accounting control and financial reporting. The independent auditors have free access to meet with the audit committee without management's presence. /s/ Bernard A. Girod /s/ Frank Meredith Bernard A. Girod Frank Meredith Vice Chairman and Executive Vice President and Chief Executive Officer Chief Financial Officer 22 281 Independent Auditor's Report The Board of Directors and Shareholders of Harman International Industries, Incorporated: We have audited the accompanying consolidated balance sheets of Harman International Industries, Incorporated and subsidiaries as of June 30, 2000 and 1999 and the related consolidated statements of operations, cash flows and shareholders' equity for each of the years in the three-year period ended June 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Harman International Industries, Incorporated and subsidiaries as of June 30, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2000 in conformity with generally accepted accounting principles. /s/ KPMG Los Angeles, California August 10, 2000 23 282 Consolidated Balance Sheets Harman International Industries, Incorporated and Subsidiaries
June 30, 2000 and 1999 ($000s omitted except share amounts) Assets 2000 1999 ----------- ---------- Current assets Cash and cash equivalents $ 4,365 2,963 Receivables (less allowance for doubtful accounts of $11,760 in 2000 and $8,732 in 1999) 306,596 303,371 Inventories (note 3) 298,273 280,115 Other current assets 61,792 60,160 ----------- ---------- Total current assets 671,026 646,609 Property, plant and equipment, net (notes 4, 6 and 7) 251,737 241,063 Excess of cost over fair value of assets acquired (less accumulated amortization of $32,196 in 2000 and $25,788 in 1999) 166,647 140,824 Other assets 48,095 37,259 ----------- ---------- Total assets $ 1,137,505 1,065,755 ----------- ---------- Liabilities and Shareholders' Equity Current liabilities Short-term borrowings (notes 5 and 6) $ 14,969 19,411 Current portion of long-term debt (note 6) 7,537 11,750 Accounts payable 161,333 120,116 Accrued liabilities 177,542 135,544 ----------- ---------- Total current liabilities 361,381 286,821 Borrowings under revolving credit facility (note 6) 11,835 34,375 Senior long-term debt (note 6) 242,983 246,039 Other non-current liabilities 33,918 29,585 Minority interest 1,055 748 Shareholders' equity (notes 6, 8, and 11) Preferred stock, $.01 par value. Authorized 5,000,000 shares; none issued and outstanding -- -- Common stock, $.01 par value. Authorized 50,000,000 shares; issued 18,775,304 shares in 2000 and 18,722,735 shares in 1999 188 187 Additional paid-in capital 292,897 290,873 Equity adjustment from foreign currency Translation (59,131) (41,885) Retained earnings 322,383 252,989 Less common stock held in treasury (1,744,000 shares in 2000 and 965,400 shares in 1999) (70,004) (33,977) ----------- ---------- Total shareholders' equity 486,333 468,187 ----------- ---------- Commitments and contingencies (notes 7, 11 and 13) Total liabilities and shareholders' equity $ 1,137,505 1,065,755 ----------- ----------
See accompanying notes to consolidated financial statements. 24 283 Consolidated Statements of Operations Harman International Industries, Incorporated and Subsidiaries
Years Ended June 30, 2000, 1999 and 1998 ($000s omitted except per share amounts) 2000 1999 1998 ----------- ----------- ----------- Net sales $ 1,677,939 1,500,135 1,513,255 Cost of sales 1,208,603 1,102,400 1,107,229 ----------- ----------- ----------- Gross profit 469,336 397,735 406,026 Selling, general and administrative expenses 347,614 322,008 305,701 Plant closures and severance -- 17,010 -- Asset impairment -- 20,054 -- ----------- ----------- ----------- Operating income 121,722 38,663 100,325 Other expenses Interest expense 18,507 23,641 24,885 Miscellaneous, net 386 575 (267) ----------- ----------- ----------- Income before income taxes, minority interest and extraordinary item 102,829 14,447 75,707 Income tax expense 29,923 2,706 21,851 Minority interest 68 18 30 ----------- ----------- ----------- Income before extraordinary item 72,838 11,723 53,826 Extraordinary item, net of income tax effect of $1,610 -- -- (3,583) ----------- ----------- ----------- Net income $ 72,838 11,723 50,243 ----------- ----------- ----------- Basic EPS before extraordinary item $ 4.23 0.66 2.90 Extraordinary item -- -- (0.19) ----------- ----------- ----------- Basic EPS $ 4.23 0.66 2.71 ----------- ----------- ----------- Diluted EPS before extraordinary item $ 4.13 0.65 2.86 Extraordinary item -- -- (0.19) ----------- ----------- ----------- Diluted EPS $ 4.13 0.65 2.67 ----------- ----------- ----------- Weighted average shares outstanding - basic 17,226 17,897 18,574 Weighted average shares outstanding - diluted 17,650 18,061 18,844
See accompanying notes to consolidated financial statements. 25 284 Consolidated Statements of Cash Flows Harman International Industries, Incorporated and Subsidiaries
Years Ended June 30, 2000, 1999 and 1998 ($000s omitted) 2000 1999 1998 ---------- --------- -------- Cash flows from operating activities: Net income $ 72,838 11,723 50,243 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 53,487 60,202 54,801 Amortization of intangible assets 11,131 6,578 7,713 Special charges, net of cash paid -- 54,751 -- Tax benefit attributable to stock options 137 59 172 Deferred income taxes 4,512 2,635 15,530 (Gain) loss on disposition of assets 3,117 942 (6,454) Change in working capital, net of acquisition/ disposition effects: Decrease (increase) in: Receivables (4,945) (14,897) 5,442 Inventories (20,557) (6,985) (24,105) Other current assets (63) 10,303 (13,598) Increase (decrease) in: Accounts payable 40,283 10,847 (403) Accrued liabilities and income taxes payable 31,278 (10,731) (7,842) Other operating activities 3,347 753 1,191 ---------- --------- -------- Net cash provided by operating activities $ 194,565 126,180 82,690 ---------- --------- -------- Cash flows from investing activities: Payment for purchase of companies, net of cash acquired $ (49,683) (568) (98,210) Proceeds from asset Dispositions 16,690 2,861 66,529 Capital expenditures (80,355) (67,830) (57,528) Purchased and capitalized software expenditure (16,306) (2,962) (6,336) Issuance of loans, net (645) (11,600) -- Other items, net 356 1,825 1,377 ---------- --------- -------- Net cash used in investing Activities $ (129,943) (78,274) (94,168) ---------- --------- -------- Cash flows from financing activities: Net (repayments) borrowings under lines of credit $ (3,240) 1,477 3,084 Proceeds from issuance of long-term debt 11,740 35,206 236,640 Repayments of long-term debt (33,568) (63,002) (215,412) Repurchase of common stock (36,027) (33,977) -- Dividends paid to Shareholders (3,444) (3,589) (3,715) Exercise of stock options 1,888 2,479 3,675 ---------- --------- -------- Net cash flow provided by (used in) financing activities $ (62,651) (61,406) 24,272 ---------- --------- -------- Effect of exchange rate changes on cash (569) 259 (820) ---------- --------- -------- Net increase (decrease) in cash and cash equivalents 1,402 (13,241) 11,974 Cash and cash equivalents at beginning of year 2,963 16,204 4,230 ---------- --------- -------- Cash and cash equivalents at end of year $ 4,365 2,963 16,204 Supplemental schedule of non-cash investing activities: Fair value of assets acquired $ 78,084 1,672 160,164 Cash paid for the capital stock 49,683 568 98,210 ---------- --------- -------- Liabilities assumed $ 28,401 1,104 61,954 ---------- --------- --------
See accompanying notes to consolidated financial statements. 26 285 Consolidated Statements of Shareholders' Equity Harman International Industries, Incorporated and Subsidiaries
Years Ended June 30, 2000, 1999 and 1998 ($000s omitted) Accumulated foreign Common Additional currency Net Share- Stock $.01 paid-in translation Retained Treasury holders' par value capital adjustments earnings stock equity ------- -------- -------- -------- -------- -------- Balance, June 30, 1997 $ 185 284,490 (16,240) 198,327 -- 466,762 ------- -------- -------- -------- -------- -------- Exercise of stock options 1 3,674 -- -- -- 3,675 Tax benefit attributable to stock option plan -- 172 -- -- -- 172 Dividends ($.20 per share) -- -- -- (3,715) -- (3,715) Comprehensive income -- -- (5,238) 50,243 -- 45,005 ------- -------- -------- -------- -------- -------- Balance, June 30, 1998 $ 186 288,336 (21,478) 244,855 -- 511,899 ------- -------- -------- -------- -------- -------- Exercise of stock options 1 2,478 -- -- -- 2,479 Tax benefit attributable to stock option plan -- 59 -- -- -- 59 Common stock repurchases -- -- -- -- (33,977) (33,977) Dividends ($.20 per share) -- -- -- (3,589) -- (3,589) Comprehensive income -- -- (20,407) 11,723 -- (8,684) ------- -------- -------- -------- -------- -------- Balance, June 30, 1999 $ 187 290,873 (41,885) 252,989 (33,977) 468,187 ------- -------- -------- -------- -------- -------- Exercise of stock options 1 1,887 -- -- -- 1,888 Tax benefit attributable to stock option plan -- 137 -- -- -- 137 Common stock repurchases -- -- -- -- (36,027) (36,027) Dividends ($.20 per share) -- -- -- (3,444) -- (3,444) Comprehensive income -- -- (17,246) 72,838 -- 55,592 ------- -------- -------- -------- -------- -------- Balance, June 30, 2000 $ 188 292,897 (59,131) 322,383 (70,004) 486,333 ------- -------- -------- -------- -------- --------
See accompanying notes to consolidated financial statements. 27 286 Notes to Consolidated Financial Statements Harman International Industries, Incorporated and Subsidiaries 1. Summary of Significant Accounting Policies Consolidation and Revenue Recognition Principles. The consolidated financial statements include the accounts of the Company and subsidiaries after the elimination of significant intercompany transactions and accounts. Revenue is primarily recognized upon shipment of goods. Where necessary, prior years' information has been reclassified to conform to the 2000 consolidated financial statement presentation. Cash Equivalents. Cash equivalents of $0.2 million with maturities less than three months were included in cash and cash equivalents at June 30, 2000. Inventories. Inventories are valued at the lower of cost or market. Cost is determined principally by the first-in, first-out method. Property, Plant and Equipment. Property, plant and equipment is recorded at cost or, in the case of capitalized leases, at the present value of the future minimum lease payments. Depreciation and amortization of property, plant and equipment is provided primarily using the straight-line method over useful lives estimated from 3 to 30 years. Buildings and improvements are depreciated over 3 to 30 years or the term of the lease, whichever is shorter. Machinery and equipment are depreciated over 5 to 10 years and furniture and fixtures are depreciated over 3 years. Income Taxes. The deferred income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected reversal of the cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income tax purposes. Deferred income tax expense is measured by the change in the net deferred income tax asset or liability during the year. The Company has not provided U.S. federal or foreign withholding taxes on foreign subsidiary undistributed earnings as of June 30, 2000, because such earnings are intended to be permanently invested. It is not practicable to determine the U.S. Federal income tax liability, if any, that would be payable if such earnings were not reinvested indefinitely. Foreign Currency Translation. Assets and liabilities in foreign functional currencies are translated into U.S. dollars based upon the prevailing currency exchange rates in effect at the balance sheet date. Translation gains and losses are not included in the determination of net income but are accumulated in a separate component of shareholders' equity. These translation gains and losses are the only component of comprehensive income in addition to net income. Excess of Cost over Fair Value of Assets Acquired. The net excess of cost over fair value of assets acquired is being amortized over periods from 3 to 40 years, using the straight-line method. The Company evaluates the recoverability of the intangible assets through comparisons of projected cash flows from the related assets. Purchased and Deferred Software Costs. Software costs that are related to conceptual formulation and incurred prior to the establishment of technological feasibility are expensed as incurred. Costs incurred to purchase software to be sold as an integral component of a product are deferred. Software costs for products which demonstrate technological feasibility and which deferred cost is considered recoverable by management are deferred in compliance with SFAS 86. The deferred costs are amortized over the product's life,usually three years. At June 30, 2000, purchased software costs were $7.3 million and other deferred software costs totaled $9.8 million, net of accumulated amortization of $5.7 million. Deferred costs at June 30, 1999, totaled $6.7 million, net of accumulated amortization of $1.1 million. Deferred costs are principally comprised of costs to acquire or develop automotive navigation, telecommunications and networking software. Research and Development. Research and development costs are expensed as incurred. The Company's expenditures for research and development were $76.2 million, $76.0 million and $65.9 million for the fiscal years ending June 30, 2000, 1999 and 1998, respectively. Stock Option Plan. Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the Company elected to continue to apply the provisions of APB Opinion No. 25 for stock-based compensation accounting and reporting. The Company provides disclosure of pro forma net income and pro forma earnings per share for grants made in 1995 and future years as if the fair- value-based method defined in SFAS No. 123 had been applied. Use of Estimates. Estimates and assumptions have been made relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reporting of revenues and expenses during the reporting periods to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 28 287 Recent Accounting Pronouncements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. For a derivative designated as a hedge, gain or loss is netted against the offsetting loss or gain on the hedged item. SFAS No. 133, as amended, is effective for financial statements issued for periods beginning after June 15, 2000. Adoption of SFAS No. 133 should not have a material effect on the Company's results of operations, liquidity or financial condition. 2. Restructuring and special charges During the second quarter of fiscal 1999, the Company implemented a restructuring program designed to improve the profitability of the consumer business and other operations. The following initiatives were implemented: (1) a major re-alignment of the consumer audio dealer and distribution structure to strengthen the positioning of our various brands, (2) elimination of a significant number of marginally profitable product lines, and (3) significant overhead reductions due to product line eliminations and weakening consumer market conditions. As a result, the El Paso manufacturing facility was closed, facilities located in California, Japan, Brazil and France were closed, and jobs were eliminated at facilities in Switzerland, the United Kingdom, California, New York and Massachusetts. Approximately 450 full- time positions were eliminated. The Company discontinued certain product lines and reduced its dealer base. As a result, the Company wrote off certain assets that no longer provide economic benefit. These actions resulted in pretax charges totaling $66.4 million. The components of the restructuring charge and utilization of the provisions through June 30, 2000, are presented below.
Plant closures and severance $ 17.0 14.7 2.3 1.6 $ 0.7 Asset impairment 20.0 18.7 1.3 1.3 0.0 Inventories 24.3 11.9 12.4 11.7 0.7 Other 5.1 5.1 0.0 0.0 0.0 --------- ---------- --------- ---------- --------- Total $ 66.4 50.4 16.0 14.6 $ 1.4 --------- ---------- --------- ---------- ---------
Provision balances remaining at June 30, 2000, are primarily comprised of mark-downs for inventories to be disposed and the present value of future lease commitments net of sublease income associated with certain facility closures. 3. Inventories Inventories consist of the following: June 30 ($000s omitted) 2000 1999 ---------------------------------------------- Finished goods $134,038 137,566 Work in process 40,815 37,317 Raw materials 123,420 105,232 -------- -------- Total $298,273 280,115 -------- -------- 4. Property, Plant and Equipment Property, plant and equipment are composed of the following: June 30 ($000s omitted) 2000 1999 ------------------------------------------------- Land $ 4,647 3,949 Buildings and improvements 116,376 95,567 Machinery and equipment 326,264 320,759 Furniture and fixtures 38,885 40,849 -------- -------- 486,172 461,124 Less accumulated depreciation and amortization (234,435) (220,061) -------- -------- Property, plant and equipment, net $ 251,737 241,063 -------- -------- 5. Short-Term Borrowings At June 30, 2000, the Company had unsecured short-term lines of credit for certain international subsidiaries aggregating $16.2 million with outstanding borrowings of $11.8 million. Interest rates based on various indices ranged from 4.9 percent to 7.5 percent. At June 30, 1999, the Company had outstanding borrowings of approximately $12.6 million and interest rates ranging from 3.2 percent to 7.0 percent. 29 288 Notes to Consolidated Financial Statements continued Harman International Industries, Incorporated and Subsidiaries The Company utilizes the swing line feature of the revolving credit facility to meet its short-term borrowing requirements. At June 30, 2000, the Company had $3.1 million drawn on its swing lines at base rates in the local countries where the funds were drawn, ranging from 3.0 percent in Switzerland to 7.0 percent in Germany. At June 30, 1999, the Company had $6.8 million drawn on its swing lines at base rates in the local countries where the funds were drawn, ranging from 3.0 percent in Switzerland to 5.5 percent in the United Kingdom. 6. Long-Term Debt The Company and certain subsidiaries have a five-year multi- currency revolving credit facility with a group of eleven banks committing $275 million to the Company for cash borrowings and letters of credit through September 30, 2002. At June 30, 2000, the Company had borrowings of $15.0 million on the revolving credit facility (including swing line, competitive advance and revolving credit borrowings) and outstanding letters of credit of $7.3 million. The unused credit under the revolving credit facility at June 30, 2000, was $252.7 million. The interest rate on the June 30, 2000 competitive advance and revolving credit borrowings, at LIBOR plus 0.20 percent, was 7.6 percent in the United States. The Company is required under the revolving credit agreement to maintain certain financial ratios and meet certain net worth and indebtedness tests. The Company was in compliance with such covenants at June 30, 2000 and 1999. The Company's other long-term debt agreements contain covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional indebtedness, create restrictions on subsidiary dividends and distributions, limit the Company's ability to encumber certain assets and restrict the Company's ability to issue capital stock of its subsidiaries. The Company was in compliance with the terms of its long-term debt agreements at June 30, 2000 and 1999. Under the most restrictive provisions, limited amounts of dividends may be paid as of June 30, 2000. Interest paid for both short- and long-term borrowings was $20,472,000, $25,288,000, and $27,576,000 during the fiscal years ended June 30, 2000, 1999 and 1998, respectively. Long-term debt is composed of the following: June 30 ($000s omitted) 2000 1999 --------------------------------------------------------- Borrowings under revolving credit facility, due September 30, 2002, with variable rates; rate was 7.6% at June 30, 2000 $ 11,835 34,375 Senior notes, unsecured, due July 1, 2007, interest due semiannually at 7.3% 150,000 150,000 Borrowings under Deutschmark facility, due August 30, 2002; variable rate was 4.7% at June 30, 2000 73,230 79,321 Obligations under capital leases (note 7) 12,710 24,214 Other unsubordinated loans due in installments through 2030, some of which vary with the prime rate, bearing interest at an average effective rate of 4.0% at June 30, 2000 14,580 4,254 -------- -------- Total 262,355 292,164 Less current installments (7,537) (11,750) -------- -------- Long-term debt $254,818 280,414 -------- -------- Long-term debt, including obligations under capital leases, maturing in each of the next five fiscal years (000Os omitted) is as follows: ------------------------------------ 2001 $ 7,537 2002 1,814 2003 85,871 2004 836 2005 888 Thereafter 165,409 ------------------------------------ 30 289 7. Leases The following analysis represents property under capital leases: June 30 ($000s omitted) 2000 1999 ----------------------------------------------------- Capital lease assets $ 34,361 42,462 Less accumulated amortization (19,325) (14,557) --------- -------- Net $ 15,036 27,905 --------- -------- Capital lease obligations of $7.4 million and $12.9 million were incurred to fund equipment additions during the fiscal years ended June 30, 1999 and 1998, respectively. No new capital lease obligations were incurred in fiscal 2000. At June 30, 2000, the Company is liable for the following minimum lease commitments under terms of noncancelable lease agreements: Capital Operating ($000s omitted) Leases Leases --------------------------------------------------- 2001 $ 7,464 $ 48,528 2002 1,529 44,363 2003 737 39,789 2004 782 35,182 2005 735 23,267 Thereafter 2,663 67,996 -------- -------- Total minimum lease payments 13,910 $259,125 less interest (1,200) -------- -------- Present value of minimum lease payments $ 12,710 -------- Operating lease expense net of subrental income under operating leases having noncancelable terms of greater than one year for the years ended June 30, 2000, 1999 and 1998 was $43,731,000, $35,072,000, and $33,288,000, respectively. 8. Stock Option Plan The 1992 Incentive Plan (the 1992 Plan) provides for the grant of stock options, stock appreciation rights in tandem with options, restricted stock and performance units to officers, key employees and consultants of the Company and its subsidiaries. In addition, the 1992 Plan provides for the automatic annual grant of options to the non-officer directors of the Company and for a further automatic grant to such non-officer directors each year in which the Company achieves a specified level of return on consolidated equity. The 1992 Plan replaces the Company's 1987 Plan and adds an automatic grant feature for non-officer directors. The 1987 Plan has been terminated; however, options previously granted pursuant to this Plan remain outstanding and will be exercisable in accordance with the terms of the Plan. Stock appreciation rights allow the holders to receive a predetermined percentage of the spread between the option price and the current value of the shares. A grant of restricted stock involves the immediate transfer to a participant of ownership of a specified number of shares of Common Stock in consideration of the performance of services. The participant is entitled immediately to voting, dividend and other share ownership rights. A transfer of restricted stock may be made without consideration or in consideration of a payment by the participant that is less than current market value, as the Compensation and Option Committee may determine. A performance unit is the equivalent of $100 and is granted for the achievement of specified management objectives. No stock appreciation right, performance unit or restricted stock grants have been made through June 30, 2000. Options to purchase shares of Common Stock have been granted under both Plans. Options granted are at prices not less than market value on the date of grant and, under the terms of the 1992 Plan, may not be repriced. Options granted pursuant to the 1987 and 1992 Plans generally vest over five years and expire ten years from the date of grant. In August 1998, the Company granted performance-based stock options to a group of employees that only vest as Harman's common stock price achieves specified target levels and the average closing stock price remains at or above those levels for at least 30 consecutive calendar days. These options were granted at a price of $39.75 per share, equal to the market price on the date of grant, and expire in August 2008. The Company measures the cost of 31 290 these performance-based options as the difference between the exercise price and market price required for vesting and recognizes this expense over the period to the estimated vesting dates and in full for options that have vested. In fiscal 2000, the Company recognized $2.0 million in compensation expense for the performance-based options. The fair value of each option granted has been estimated on the date of grant using the Black-Scholes option-pricing model, with the following assumptions for grants in fiscal 2000, fiscal 1999 and fiscal 1998: annual dividends consistent with the Company's current dividend policy, which resulted in payments of $0.20 per share in the last three years; expected volatility of 33 percent in fiscal 2000 and in fiscal 1999 and 34 percent in fiscal 1998; risk free interest rate of 6.4 percent in fiscal 2000, 5.7 percent in fiscal 1999 and 5.2 percent in fiscal 1998; and expected life of 2.3 years from the vesting date. The weighted average fair value of options granted was $19.11 in fiscal 2000, $19.74 in fiscal 1999 and $16.56 in fiscal 1998. Pro forma compensation cost for grants under the stock option program since July 1, 1995, recognized in accordance with SFAS No. 123, would reduce the Company's net income from $72.8 million (diluted EPS of $4.13) to $68.6 million (diluted EPS of $3.89) in fiscal 2000, from $11.7 million (diluted EPS of $0.65) to $9.5 million (diluted EPS of $0.52) in fiscal 1999, and from $50.2 million (diluted EPS of $2.67) to $47.9 million (diluted EPS of $2.54) in fiscal 1998. Because the pro forma compensation cost for the stock option program is recognized over the five year vesting period, the foregoing pro forma reductions in the Company's net income are not representative of anticipated amounts in future years. At June 30, 2000, a total of 3,050,331 shares of Common Stock were reserved for issuance under the 1992 Plan. Stock Option Activity Summary: Years ended June 30 Weighted Average Shares Exercise Price --------------------------------------------------- Balance at June 30, 1997 1,448,436 $ 32.11 --------- Granted 313,550 $ 41.98 Canceled (96,708) $ 39.71 Exercised (190,945) $ 22.37 --------- Balance at June 30, 1998 1,474,333 $ 34.97 --------- Granted 590,250 $ 41.46 Canceled (160,839) $ 40.48 Exercised (89,413) $ 27.73 --------- Balance at June 30, 1999 1,814,331 $ 36.95 --------- Granted 484,000 $ 45.72 Canceled (66,625) $ 35.92 Exercised (52,569) $ 42.11 --------- Balance at June 30, 2000 2,179,137 $ 38.76 --------- Options Outstanding at June 30, 2000 Weighted average Weighted Range of Number of remaining average exercise prices options life in years exercise price --------------------------------------------------------- $ 7.38- 7.38 77,300 1.37 $ 7.38 $ 11.31-11.31 8,400 2.36 $ 11.31 $ 19.76-28.01 234,090 3.30 $ 24.74 $ 30.17-45.19 1,492,197 7.06 $ 40.43 $ 46.13-53.25 367,150 8.62 $ 48.12 ------------- --------- $ 7.38-53.25 2,179,137 6.70 $ 38.76 ------------- --------- Options Exercisable at June 30, 2000 Weighted Range of Number of average exercise prices options exercise price ------------------------------------------ $ 7.38- 7.38 77,300 $ 7.38 $ 11.31-11.31 8,400 $ 11.31 $ 19.76-28.01 234,090 $ 24.74 $ 30.17-45.19 691,062 $ 38.17 $ 46.13-53.25 70,800 $ 52.01 ------------- --------- $ 7.38-53.25 1,081,652 $ 33.76 ------------- --------- 32 291 At June 30, 1999, options with an average exercise price of $31.74 were exercisable on 871,764 shares. At June 30, 1998, options with an average exercise price of $30.10 were exercisable on 801,251 shares. 9. Income Taxes The tax provisions and analysis of effective income tax rates are comprised of the following items: Years Ended June 30 ($000s omitted) 2000 1999 1998 ---------------------------------------------------------- Provision for Federal income taxes before credits at statutory rate $ 35,990 5,056 26,497 State income taxes 276 (182) 1,878 Difference between Federal statutory rate and foreign effective rate (384) (3,863) (8,335) Permanent differences between financial and tax accounting income 624 654 831 Tax exempt foreign sales corporation earnings (1,139) (1,483) (1,575) Change in valuation allowance (2,422) -- (6,609) Change in other tax liabilities (1,257) 966 5,919 Losses without income tax benefit 673 3,158 3,984 Federal income tax credits (1,875) (1,500) (1,500) Other (563) (100) 761 -------- ------- ------- Total $ 29,923 2,706 21,851 -------- ------- ------- Income tax expense (benefit) consists of the following: Years Ended June 30 ($000s omitted) 2000 1999 1998 -------------------------------------------------- Current: Federal $ 10,158 (2,847) 12,860 State 368 305 1,864 Foreign 21,528 14,638 10,556 -------- ------- ------- 32,054 12,096 25,280 -------- ------- ------- Deferred: Federal (2,039) (8,903) (4,079) State (92) (487) 650 -------- ------- ------- (2,131) (9,390) (3,429) -------- ------- ------- Total $ 29,923 2,706 21,851 -------- ------- ------- Deferred taxes are recorded based upon differences between the financial statement and tax basis of assets and liabilities and available tax loss carry-forwards. The following deferred taxes (1999 adjusted as per income tax return) are recorded: Assets/(liabilities) June 30 ($000s omitted) 2000 1999 ---------------------------------------------------- Inventory costing differences $ 6,387 5,984 Foreign net operating loss 7,862 7,862 Valuations and other allowances 9,863 10,981 -------- ------- Total gross deferred tax asset $ 24,112 24,827 Less valuation allowance (5,440) (7,862) -------- ------- Deferred tax asset $ 18,672 16,965 Total gross deferred tax liability from fixed asset depreciation (9,554) (9,978) -------- ------- Net deferred tax asset $ 9,118 6,987 -------- ------- Management believes the results of future operations will generate sufficient taxable income to realize the net deferred tax asset. 33 292 The Company acquired tax loss carryforwards from certain foreign subsidiaries. A portion of the Company's loss carryforward in Austria has been recorded as an asset. No other loss carryforward assets have been recorded. Goodwill reduction resulting from tax loss carryforward utilization at Becker, in German marks, was 12.4 million in fiscal 2000, 22.9 million in fiscal 1999 and 28.1 million in fiscal 1998. Cash paid (refunded) for Federal, state and foreign income taxes was $2,306,000, ($1,985,000), and $17,299,000, during fiscal years ended June 30, 2000, 1999 and 1998, respectively. Accrued income taxes were $26.2 million and $6.2 million as of June 30, 2000 and 1999, respectively. These balances are included in accrued liabilities. 10. Business Segment Data The Company's predominant business is the manufacture of high fidelity audio and video products. Our businesses are organized based on the end-user markets served - consumer and professional. The Consumer Systems Group manufactures loudspeakers and electronics for high fidelity audio reproduction in the home, with computers and in vehicles. Home applications include two-channel audio, multi-channel audio/video and personal computer audio. Consumer products are marketed worldwide under brand names including JBL, Harman Kardon, Infinity, Revel, Mark Levinson and Proceed. In the consumer segment, car audio sales to DaimlerChrysler accounted for approximately 22.3%, 23.4% and 20.1% of consolidated net sales for the years ended June 30, 2000, 1999 and 1998. The Professional Group manufactures loudspeakers and electronics used by audio professionals in concert halls, cinemas, recording studios, broadcasting operations and live music events. Professional products are marketed worldwide under brand names including JBL, AKG, Studer, Lexicon, Soundcraft, DOD, Digitech and dbx. The following table reports external sales, operating income, assets, capital expenditures and depreciation and amortization by segment. Segmentation Years ended June 30 ($000s omitted) 2000 1999 1998 ---------------------------------------------------------------- External sales: Consumer $ 1,201,642 1,066,358 1,050,169 Professional 476,297 433,744 439,474 Other -- 33 23,612 ----------- ---------- ---------- Total $ 1,677,939 1,500,135 1,513,255 ----------- ---------- ---------- Operating income: Consumer $ 97,567 89,011 94,603 Professional 36,148 27,005 18,862 Other (11,993) (10,907) (13,140) Restructuring charges -- (66,446) -- ----------- ---------- ---------- Total $ 121,722 38,663 100,325 ----------- ---------- ---------- Assets: Consumer $ 775,389 770,270 795,018 Professional 330,467 267,274 267,660 Other 31,649 28,211 68,006 ----------- ---------- ---------- Total $ 1,137,505 1,065,755 1,130,684 ----------- ---------- ---------- Capital expenditures: Consumer $ 71,098 53,057 40,757 Professional 8,840 14,010 16,121 Other 417 763 650 ----------- ---------- ---------- Total $ 80,355 67,830 57,528 ----------- ---------- ---------- Depreciation and amortization: Consumer $ 48,943 48,345 43,706 Professional 14,124 15,574 15,753 Other 1,551 2,861 3,055 ----------- ---------- ---------- Total $ 64,618 66,780 62,514 ----------- ---------- ---------- 34 293 Net sales and long-lived assets by geographic area for the years ended June 30, 2000, 1999 and 1998 were as follows. Years Ended June 30 ($000s omitted) 2000 1999 1998 ---------------------------------------------------------------- Net sales: U.S. $ 786,296 593,004 627,516 Europe 652,295 652,446 580,857 Other 239,348 254,685 304,882 ----------- ---------- ---------- Total $ 1,677,939 1,500,135 1,513,255 ----------- ---------- ---------- Long-lived assets: U.S. $ 211,212 161,476 183,142 Europe 223,811 233,947 243,959 Other 8,072 4,326 3,481 ----------- ---------- ---------- Total $ 443,095 399,749 430,582 ----------- ---------- ---------- 11. Commitments and Contingencies The Company and its subsidiaries are involved in several legal actions. The outcome cannot be predicted with certainty; however, management, based upon advice from legal counsel, believes such actions are either without merit or will not have a material adverse effect on the Company's financial position or results of operations. Through July 1999, common stock repurchase authorizations by Harman's Board of Directors totaled 2.5 million shares. In August 2000, the Board of Directors authorized a two-for-one stock split and also authorized the repurchase of an additional two million shares, post-split. Through June 30, 2000, the Company has acquired and placed in treasury 1,744,000 shares of its common stock at a total cost of $70.0 million. In July 2000, the Company repurchased an additional 625,000 shares. Future repurchases are expected to be funded with operating cash flow. The Company has a forward stock purchase contract outstanding under which a financial institution purchases Harman shares and ultimately settles with the Company at a price based on the institution's purchase price. The Company determines whether the contract is settled in net cash, net shares or by taking physical delivery of shares for cash. If the Company determines to settle the contract in cash, the amount of cash paid or received is reported as a reduction of, or an addition to, paid-in capital at that time. In July 2000, the Company elected to settle the contract by taking physical delivery of 585,700 shares of the Company's common stock for $30 million. 12. Employee Benefit Plans Under the Retirement Savings Plan, domestic employees may contribute up to 12.0% of their pretax compensation. Highly compensated employees are limited to a 6 percent maximum deferral subject to review by the Corporate Executive committee each year. With the approval of the Board of Directors, each division may make a basic contribution equal to 3.0% of a participant's eligible compensation; a matching contribution of up to 3.0% (50.0% on the first 6.0% of an employee's tax-deferred contribution); and a profit sharing contribution. Profit sharing and matching contributions vest at a rate of 25.0% for each year of service with the employer, following three full years of service. Expenses related to the Retirement Savings Plan for the years ended June 30, 2000, 1999 and 1998 totaled $5,818,409, $5,654,000 and $5,448,000, respectively. The Company also has a Supplemental Executive Retirement Plan (SERP) that provides normal retirement, preretirement and termination benefits, as defined, to certain key executives designated by the Board of Directors. Expenses related to the SERP for the years ended June 30, 2000, 1999 and 1998 were $1,887,306, $737,400 and $668,000, respectively. Additionally, certain non-domestic subsidiaries maintain defined benefit pension plans. These plans are not material to the accompanying consolidated financial statements. 35 294 13. Fair Value of Financial Instruments The estimated fair value of the Company's financial instruments was determined using market information and valuation methodologies. In the measurement of the fair value of certain financial instruments, quoted market prices were unavailable and other valuation techniques were utilized. These derived fair value estimates are significantly affected by the assumptions used. Foreign Currency Contracts. At June 30, 2000, the Company had contracts maturing through June 2001, to purchase and sell the equivalent of approximately $42 million of various currencies to hedge future foreign currency purchases and sales. The fair value of the forward contracts at June 30, 2000, was approximately $500,000. The fair value of the contracts was not recorded in the June 30, 2000, financial statements pursuant to the hedge accounting provisions of SFAS No. 52. Long-Term Debt. Fair values of long-term debt are based on market prices where available. When quoted market prices are not available, fair values are estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying value and fair value of long-term debt, excluding obligations under capital leases and unsubordinated loans, were $235.1 million and $224.7 million, respectively, at June 30, 2000. 14. Acquisitions In March 2000, the Company acquired professional amplifier manufacturer Crown International (Crown), located in Elkhart, Indiana. In December 1999, the Company acquired Innovative Systems GmbH (IS), a leading developer of route guidance, positioning and navigation software, located in Hamburg, Germany. The acquisitions of Crown and IS were not material to the consolidated financial statements. In August 1997, the Company acquired Oxford, a manufacturer of automotive OEM loudspeakers for Chrysler with facilities in the United States and Mexico. In December 1997, the Company acquired Audio Electronic Systems (AES), a manufacturer of automotive OEM loudspeakers with facilities in Germany, Sweden and Hungary. AES supplies loudspeakers on an OEM basis to European automakers including BMW, Mercedes, Volvo, Volkswagen and Fiat. The acquisitions of Oxford and AES were not material to the consolidated financial statements. 15. Subsequent Event On August 16, 2000, the Company announced that its Board of Directors had approved a two-for-one split of its common stock, to be effected in the form of a stock dividend. Shareholders on the record date of August 28, 2000, will be entitled to one additional share for every share they own on that date. New shares will be issued by the Company's transfer agent on or about September 19, 2000. 36 295 16. Earnings Per Share Information
Years Ended June 30 ($000s omitted except per share amounts) 2000 1999 1998 ------------------------------------------------------------------------------------------ Basic Diluted Basic Diluted Basic Diluted -------- ------- ------- ------- ------- ------- Income before extraordinary item $ 72,838 72,838 11,723 11,723 53,826 53,826 Extraordinary item, net of taxes -- -- -- -- (3,583) (3,583) -------- ------- ------- ------- ------- ------- Net income $ 72,838 72,838 11,723 11,723 50,243 50,243 -------- ------- ------- ------- ------- ------- Shares of Harman common stock outstanding 17,226 17,226 17,897 17,897 18,574 18,574 Employee stock options -- 424 -- 164 -- 270 -------- ------- ------- ------- ------- ------- Total average equivalent shares 17,226 17,650 17,897 18,061 18,574 18,844 -------- ------- ------- ------- ------- ------- Earnings per share before extraordinary item $ 4.23 4.13 0.66 0.65 2.90 2.86 Extraordinary item, net of taxes -- -- -- -- (0.19) (0.19) -------- ------- ------- ------- ------- ------- Earnings per share $ 4.23 4.13 0.66 0.65 2.71 2.67 -------- ------- ------- ------- ------- -------
17. Quarterly Summary of Operations (unaudited) The following is a summary of operations by quarter for fiscal 2000 and 1999: Three months ended: ($000s omitted except per share amounts)
Fiscal 2000 SEPT 30 DEC 31 MAR 31 JUN 30 ------------------------------------------------------------------------------ Net sales $ 356,773 450,826 423,931 446,409 Gross profit $ 96,243 126,491 124,179 122,423 Net income $ 4,894 22,307 22,317 23,320 EPS - basic * $ 0.28 1.30 1.30 1.37 EPS - diluted * $ 0.28 1.28 1.26 1.32 Fiscal 1999 Net sales $ 315,896 387,518 374,904 421,817 Gross profit $ 83,735 84,447 104,961 124,592 Net income $ 8,491 (30,562) 12,817 20,977 EPS - basic * $ 0.46 (1.73) 0.72 1.18 EPS - diluted * $ 0.45 (1.73) 0.72 1.17
Note: Quarter ended December 31, 1999, includes special charges totaling $66.4 million, equal to $2.59 per share. * Quarters do not add to full year due to changes in shares outstanding. 37 296 Shareholder Information Harman International Industries, Incorporated and Subsidiaries
Market Price Fiscal 2000 Fiscal 1999 Fiscal 1998 High Low High Low High Low --------------------------------------------------------------------------------------------- First quarter ended September 30 $47.188 40.938 $42.125 32.500 $50.063 39.000 Second quarter ended December 31 56.125 36.750 44.500 31.500 57.063 35.250 Third quarter ended March 31 63.750 55.000 42.688 35.813 46.813 38.250 Fourth quarter ended June 30 68.500 56.000 47.500 34.250 46.438 36.750
The Common Stock of the Company is listed on the New York Stock Exchange and is reported on the New York Stock Exchange Composite Tape under the symbol HAR. As of June 30, 2000, the Company's Common Stock was held by approximately 182 record holders. The table above sets forth the reported high and low sales prices of the Company's Common Stock, as reported on the New York Stock Exchange, for each quarterly period for fiscal years ended June 30, 2000, 1999, and 1998. The Company paid dividends during fiscal years 2000, 1999 and 1998 of $.20 per share, with a dividend of $.05 paid in each of the four quarters. 38 297 Corporate Officers Sidney Harman Executive Chairman Bernard A. Girod Vice Chairman and Chief Executive Officer Gregory Stapleton President and Chief Operating Officer Frank Meredith Executive Vice President and Chief Financial Officer Erich Geiger Chief Technical Officer William S. Palin Vice President - Controller Sandra B. Robinson Vice President - Financial Operations Edwin Summers Vice President and General Counsel Floyd E. Toole Vice President - Acoustics Securities Traded New York Stock Exchange Symbol: HAR Corporate Headquarters 1101 Pennsylvania Avenue, NW Suite 1010 Washington, D.C. 20004 202-393-1101 www.harman.com Directors Bernard A. Girod Sidney Harman Shirley Mount Hufstedler Ann McLaughlin Edward H. Meyer Gregory Stapleton Stanley A. Weiss Annual Meeting The annual meeting of shareholders will be held on November 9, 2000, at Chase Manhattan Bank, 270 Park Avenue, New York, NY 10017 at 11:00 a.m. EST. A proxy was sent to shareholders on or about September 11, 2000, at which time proxies for the meeting were requested. Registrar and Transfer Agent ChaseMellon Shareholder Services 400 South Hope Street, 4th Floor Los Angeles, CA 90071 212-553-9720 Independent Auditor KPMG LLP 355 South Grand Avenue Los Angeles, CA 90071 213-972-4000 Except for the historical information contained in this Annual Report, the matters discussed herein contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those suggested in the forward-looking statements, including without limitation, the effect of economic conditions, product demand, currency exchange rates, labor disputes, competitive products and other risks detailed herein and in the Company's other filings with the Securities and Exchange Commission. 298 [BACK COVER OF ANNUAL REPORT] [PICTURE HERE] [LOGO HERE] Harman International Industries, Incorporated 1101 Pennsylvania Avenue NW Suite 1010 Washington, DC 20004 202 393 1101 www.harman.com 299 THIS PAGE LEFT BLANK INTENTIONALLY 300